Caterpillar (CAT)

Construction equipment company Caterpillar (NYSE:CAT) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 9.5% year on year to $17.64 billion. Its non-GAAP profit of $4.95 per share was 9.4% above analysts’ consensus estimates.

Company Overview

With its iconic yellow machinery working on construction sites, Caterpillar (NYSE:CAT) manufactures construction equipment like bulldozers, excavators, and parts and maintenance services.

Automation that increases efficiencies and connected equipment that collects analyzable data have been trending, creating new sales opportunities for construction machinery companies. On the other hand, construction machinery companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the commercial and residential construction that drives demand for these companies’ offerings.

Competitors of Caterpillar include Deere (NYSE:DE), Volvo Construction Equipment (STO:VOLV-B), and Japanese multinational corporation Komatsu (TYO:6301).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Caterpillar’s sales grew at a decent 8.2% compounded annual growth rate over the last five years. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Caterpillar’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.4% over the last two years. Caterpillar isn’t alone in its struggles as the Construction Machinery industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, Caterpillar reported year-on-year revenue growth of 9.5%, and its $17.64 billion of revenue exceeded Wall Street’s estimates by 6.1%.

Looking ahead, sell-side analysts expect revenue to grow 3.7% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Caterpillar’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 29.6% gross margin over the last five years. Said differently, Caterpillar had to pay a chunky $70.41 to its suppliers for every $100 in revenue.

Caterpillar produced a 33.8% gross profit margin in Q3, marking a 1.5 percentage point increase from 32.4% in the same quarter last year. On a wider time horizon, however, Caterpillar’s full-year margin has been trending down over the past 12 months, decreasing by 1.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Caterpillar has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.8%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Caterpillar’s operating margin rose by 3.9 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q3, Caterpillar generated an operating margin profit margin of 17.3%, down 2.2 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Caterpillar’s EPS grew at an astounding 23.6% compounded annual growth rate over the last five years, higher than its 8.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Caterpillar’s earnings can give us a better understanding of its performance. As we mentioned earlier, Caterpillar’s operating margin declined this quarter but expanded by 3.9 percentage points over the last five years. Its share count also shrank by 13.8%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Caterpillar, its two-year annual EPS declines of 2% mark a reversal from its (seemingly) healthy five-year trend. We hope Caterpillar can return to earnings growth in the future.

In Q3, Caterpillar reported adjusted EPS of $4.95, down from $5.17 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 9.4%. Over the next 12 months, Wall Street expects Caterpillar’s full-year EPS of $19.06 to grow 2.1%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Caterpillar has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 13.1% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Caterpillar’s margin dropped by 1.6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Caterpillar’s free cash flow clocked in at $2.06 billion in Q3, equivalent to a 11.7% margin. The company’s cash profitability regressed as it was 7.5 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Caterpillar hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 36%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Caterpillar’s ROIC averaged 1.4 percentage point increases over the last few years. This is a good sign, and we hope the company can keep improving.

Caterpillar reported $7.54 billion of cash and $41.53 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $13.63 billion of EBITDA over the last 12 months, we view Caterpillar’s 2.5× net-debt-to-EBITDA ratio as safe. We also see its $84 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Caterpillar blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 4.9% to $550.32 immediately after reporting.

Updated: December 4, 2025 at 9:04 PM EST

Before deciding whether to buy Caterpillar or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Caterpillar isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was decent over the last five years and Wall Street believes it will continue to grow, its organic revenue declined.

Caterpillar’s P/E ratio based on the next 12 months is 28.8x. Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $587.67 on the company (compared to the current share price of $599.50).